Question

Palin’s Muffler Shop has one standard muffler that fits a large variety of cars. The shop wishes to establish a periodic review system to manage inventory of this standard muffler. Use the information in the following table to determine the optimal inventory target level (or order-up-to level).

Annual demand		3,770	mufflers	Ordering cost	$	50	per order
Standard deviation of daily demand		6	mufflers per working day	Service probability		83	%
Item cost	$	28.00	per muffler	Lead time		2	working days
Annual holding cost		30	% of item value	Working days		290	per year
Review period		18	working days

a. What is the optimal target level (order-up-to level)? (Use Excel's NORMSINV() function to find the correct critical value for the given α-level. Do not round intermediate calculations. Round "z" value to 2 decimal places and final answer to the nearest whole number.)

b. If the service probability requirement is 96 percent, the optimal target level will:

• Increase

• Decrease

• Stay the same

Answer 1

Periodic review system also called fixed interval reorder system has four original economic order quantity assumptions: -

• There are no restrictions on lot size.
• ordering cost and carrying cost
• demand should be independent
• The lead time is constant.